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August 17, 2012

Facebook Shares Hit New Low

Zuckerberg acknowledges ‘problem’ for first time

Facebook Inc.'s IPO woes continued Thursday, as it stock price hit a new low. An imposed ‘lockup’ deadline expired, allowing early investors to sell their shares, which caused the stock to tumble to just 50% of its IPO price.

The steep drop caused founder Mark Zuckerberg and other senior executives to acknowledge the problem and attempt to pump up morale.

According to The Wall Street Journal, Zuckerberg “has long exhorted employees not to pay attention to the stock price, instead pushing them to focus on developing the social network. But in a companywide meeting earlier this month, he conceded that it may be ‘painful’ to watch as investors continue to retreat from Facebook's stock.”

More distressing to employees is the fact that while early investors can sell, employees who own Facebook shares cannot. As the paper notes, lockup expirations in October, November and December will allow Zuckerberg and other employees to sell more than 1.4 billion shares. The biggest lockup expiration, freeing more than one billion shares, is set for Nov. 14. The last lockup expires next May.

The paper further reports that some of the mutual funds that invested in Facebook before its IPO are now underwater or showing paper losses. They include mutual-fund giant T. Rowe Price, which bought into Facebook in early 2011 for roughly $25 a share, according to regulatory filings.

Facebook shares fell 6.3% on Thursday, to $19.87 as more than 271 million shares—or nearly 13% of those outstanding—became eligible for sale.

The New York TimesDeal Book blog noted Friday that due to the manner in which the company was initially valuated, its share price could eventually drop to less than $10.

“Facebook [went] public at a stock price that was 100 times its earnings per share,” according to the Times. “The belief was that Facebook could entwine advertising into all interactions on its site to generate enormous revenue.

The key to successful technology IPO is “one main magical story.” For Groupon, for instance, it was that the company had found a revolutionary marketing tool that was perfect for small businesses.

“But the nightmare begins when investors stop believing in that central story …They just have to contain a few clues that the dream won’t be achieved. Then, the transition from extraordinary to ordinary is brutal.”